Out of the Election and Into the Frying Pan

Barack Obama has won the presidency, and we wish him well—for his sake, the country’s sake and for the world’s. America, in addition to being (still) a crucial factor for global economic growth, remains a beacon of hope and inspiration for liberty. All of that is on the defensive when the U.S. stumbles, as it clearly has in recent years on a number of fronts, including the economy.

The interregnum is traditionally a period of relatively calm political transition, reflection and celebration. But the honeymoon for President-elect Obama is effectively over before it’s even begun. Two wars, a hornet’s nest of other foreign-relations issues and the onset of what promises to be a painful and perhaps lengthy economic contraction insure that yesterday’s history-making election will soon give way to the immense challenges that await. Make no mistake: the challenges are of a breadth and depth that are rarely waiting on the doorstep of new presidents. No doubt he’ll be tested like few before him.

Some have compared Obama’s start with the opening of the Lincoln and FDR presidencies. That’s a bit much. Comparisons to the arrivals of Nixon and Carter are closer to the mark. Any way you slice it, Obama will have his hands full, and the odds are high that he’ll have to make tough and unpopular decisions for the next few years.

The stakes are indeed high—higher than at any time in recent memory for a new government. The fact that the incoming president’s resume is a bit light doesn’t inspire. And so we must wait, somewhat anxiously, to see his decisions on a host of subjects. One topic that he can’t afford to fumble is promoting growth, which is really the only solution to what ails America domestically speaking.
On the bright side, he’s shown himself to be thoughtful, calm and—above all–intelligent. With the circus of politicking over, one might reason that that the sober realities of governing will push the new president to make informed choices that keep America firmly in the club of growth. Let’s hope that his natural abilities and intellect carry the day in that regard. The alternative these days is too frightening to even consider.

Whatever path Obama takes, the economy will certainly be a high priority, and not necessarily for favorable reasons. Trouble continues to percolate, even if the stock market this week has chose to focus elsewhere. The widely followed ISM factor index dropped to a 26-year low, we learned on Monday. The sharply bearish trend in manufacturing was confirmed a day later with the hefty fall in the Fed’s industrial production index for September.

Today brings word that the labor market continued to fall in October. Nonfarm private employment slumped 157,000 last month on a seasonally adjusted basis, according to ADP National Employment Report. On Friday we’ll see the government’s tally for October jobs, although everyone expects the update will once again post another negative number of some significance. Par for the course in 2008, a year that, so far, has shed jobs in each and every month.

Disturbing as the general economic trend is, it comes as no surprise. Our proprietary economic index has been warning of trouble for some time now, as we’ve discussed all year, including our official recession call back in March. Our only mistake was not making the call earlier or being sufficient bearish.

In any case, there’s no mistaking the trend now. The last of the optimists have gone silent on the hope that recession, somehow, could be avoided. As our chart below illustrates, economic contraction has begun, and the writing’s been on the wall for some time now, as per the precipitous fall in our leading index of economic indicators for the U.S.

Unfortunately, we’re still in the early stages of what threatens to be a prolonged correction. What’s more, the “rebound” may be modest by historical standards, thereby exacerbating the pain that accompanies a generational unwinding of economic and financial excess. It doesn’t help that the usual prescriptions—i.e., cheap money—won’t work this time, as they have so often in the past. Even dropping interest rates to zero, which may be coming, won’t do much to stimulate demand broadly speaking. Fiscal stimulus, as a result, may be the last, best hope to keep the economic slump from turning into something worse.

The government, in short, will be spending gads more money in the coming months (and years?), over and above the already extraordinary amounts spent this year. Fortunately, there’s minimal risk of inflation at the moment, although that window of spending/borrowing opportunity won’t be open forever. One only need invoke the words Medicare, Medicaid and Social Security to remind that Washington, as we wrote a while back, is on the hook for massive amounts of spending in the years ahead—money that it doesn’t have.

Add to this mix a newly minted president-elect, fresh with hope and ambition, including his promise to lower taxes for most taxpayers below the rates the rates that prevailed during the Reagan administration. There are also plans for expansion of America’s healthcare system, and on and on.

Keep a close eye on the honeymoon that’s now in progress. If you blink, you might miss it.

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.